Chalk Up Another For Oz Know-how
Sydney Morning Herald
Tuesday July 11, 2006
THE "Australianisation" of the global property market shows no sign of tailing off, with Centro Properties' latest $4.3 billion US shopping centre deal again illustrating how the sophistication of the listed property entities and the unusual dynamics of Australian investment markets have coincided to open up a global opportunity.
It is incongruous that such a small player in terms of the global capital markets as Australia should be having such a major impact in global property markets - particularly one as sophisticated as the US. After Centro's acquisition of the Heritage Property Investment Trust, however, two Australian groups - Westfield (6) and Centro (9) - will rank among the top 10 US retail property owners. Other Australian property groups are expanding rapidly in Britain, continental Europe and Asia. Underlying the rapid push offshore is the sophistication and maturity of our listed property sector, where property has been securitised to a degree not replicated in any major offshore market. More than 60 per cent of the underlying commercial property in this market has been securitised, which is a multiple of the level of securitisation in most of the major markets offshore. That has bred sophistication but is now limiting the opportunities for the levels of growth the sector has experienced in recent years, creating pressure to enter new markets. The other factor at play is the sheer weight of funds flowing into our equity market, due largely to the compulsory super system, although it has also been aided by the impact of dividend imputation and the Howard Government's changes to the capital gains tax regime on retail investment. With demand for equities running, on some estimates, at three times the level of supply, adjustments to valuations (which might be a factor in the relatively low volatility of our market in recent years) aren't sufficient to balance demand and supply. Super funds, and other managed fund entities, have responded by looking at somewhat more exotic or risky asset classes - most of the property groups have shifted up the risk curve from their traditional relatively passive property exposures - and by increasingly looking to replicate their business models offshore. That is particularly the case for the property groups, where the physical supply-demand imbalance is exaggerated by the level of securitisation and by their scale in a market that accounts for only 2 per cent of the global property sector. With demand for securitised property growing rapidly around the world as the tax treatment of listed property entities shifts towards the real investment trust model, our property groups are perfectly placed to participate in the globalisation of property markets. Centro, with Westfield, Lend Lease, Multiplex and others, has been growing its offshore presence aggressively, with five major purchases in the US in four years, deploying their cost of capital advantage to take lock in attractive yield arbitrages. Nearly half the underlying Centro portfolio is now in the US, whereas four years ago the portfolio was purely domestic. Centro's strategy is not dissimilar to those of its key rivals, although its execution has been markedly different. The Heritage deal and the way it has been structured follows the unusual Centro model of both recycling capital while "cementing" the funds under management - a way of creating structural (rather than financial) leverage to amplify its returns on capital. Allied to the purchase would be the creation of a new $2.4 billion fund - the Centro Wholesale Fund, which would be spun off to Centro security holders - as well as a new unlisted international fund and two new unlisted international property syndicates. Under Centro's model, it shifts assets and debts down its structure into the asset- owning entities and syndicates at the bottom layer of its structure. It owns 50 per cent of the intermediate entities - its domestic and international diversified funds - and they own 50 per cent of the entities in the bottom layer. Effectively Centro has a 25 per cent interest in the underlying retail assets. That strategy has enabled Centro to reduce its ownership of property over time while increasing its funds under management dramatically. A year ago its "cemented" funds under management were about $9 billion. If the Heritage and associated transactions are completed it will have $15.7 billion of funds that it controls. The model works mainly because of the sheer demand for retail properties by investors but also because Centro has the ability to offer a menu of participation, from direct investment to specialised or diversified portfolios. It enables Centro to shift or "recycle" capital so it maintains its overall economic interest in an expanding portfolio while benefiting from the growth in fee income the expansion generates. The financial leverage sits mainly with the underlying assets. With the Heritage deal, once Centro has sold down its initial investment in the new fund and syndicates, its gearing will fall from 39 to less than 30 per cent. It releases balance sheet capacity at the top of the structure as the assets move down the structure, but doesn't relinquish control of the assets or the annuity-style fees they can generate. While it is a more complex strategy and structure than pursued by most property groups, it has enabled rapid growth without a commensurate increase in risk and without recourse to Centro security holders for big lumps of capital to finance the growth. It is the "Other People's Money" within the intermediate and asset-owning layers of the structure that fuels the growth. bartho@smh.com.au
© 2006 Sydney Morning Herald
Share This